With unemployment finally starting to ease after years of what was often described as a “jobless” economic recovery, there’s some concern that globalization, by keeping a lid on U.S. wages, will derail the recovery’s momentum.
Usually when the jobless rate declines, wages start to inch up as employers compete for workers. When the Federal Reserve starts seeing wages grow, it will pull in the reins and start raising short-term interest rates.
“The Fed’s job is to lean against too-rapid job growth, because in all modern economic cycles employers began to compete for employees by paying higher wages, ultimately producing inflation,” Inman News columnist Lou Barnes explains. “The optimists are out of their minds today, cheering the health of the economy, but the income/unemployment disconnect is without precedent — although it does connect to a different view of the world.”
Without wage growth, the deflationary environment we’re in today could put a chill on home sales, Barnes and other knowledgeable observers fret. It might be too early in the recovery to get worked up about the lack of wage growth so far, economist Tim Duy writes on his blog, Fed Watch.
Past experience suggests not to expect “significant wage growth” until we move “well below” 6 percent unemployment, Duy says.
With unemployment still falling toward that level, “it is premature to believe that there has been a breakdown in this relationship” between unemployment and the rate of wage growth, Duy writes. “So far, the response of wages is exactly what you should have expected in light of the 1980s dynamics.” Source: economistsview.typepad.com/timduy/.